Saturday, October 25, 2014

So,
the S&P 500 is up by 4.12% in the past 5 days. It seems like the recent
pullback didn’t even happen, huh? Whenever the market rebounds, I feel like a
kid who got his fucking candy stolen. Is it too much to ask for a fucking 30+%
correction?! But at least I managed to add a position to my portfolio recently,
so I don’t feel too bad (although the decline in this stock’s price has much
more to do with the crash in the coal sector than with the recent “pullback”). The stock I bought was Natural Resource
Partners (NRP) which is listed on the NYSE. According to the company’s website,
“NRP primarily owns coal, aggregate and oil and gas reserves across the United
States that generate royalty income for the partnership”. Royalties from coal
is by far the largest contributor to NRP’s revenue. The stock went up by about 12%
since I bought it. I’m sure some of the haters think I’m making this purchase up
to make my portfolio look better for the next performance report, but I don’t fucking
care. If you believe me, you believe me. If you don’t, you don’t. Last time
National Bank of Greece went up 15-20% between the time I bought it and when I first
talked about it on my blog; now I’m losing money on that position. So, there’s
always a chance that NRP’s stock price could drop in the future.

I
really like natural resource royalty companies as I think it’s a lower risk way
to get exposure to commodities. These companies don’t need to invest money to build
and maintain the mines which can be very capital intensive. They don’t have to
pay for the mine’s operating expenses. They simply collect royalties whenever
their reserves are extracted and sold by the mining companies. But because the
royalty companies don’t incur capex and operating expenses, the risk of their
financials getting fucked up because of falling commodity prices is significantly
lower than the mining companies. In fact, royalty companies have very high
margins in general and can pay out a huge chunk of the royalties they receive
as dividends.

However,
royalty companies still do face a significant amount of risk. One way for a
royalty agreement to be structured is for royalties to be calculated as a
percentage of the revenue received, by the mining companies, for the production
from the royalty company’s properties. A company which structures its royalty
agreements like that for its thermal coal reserves, for example, could see
significantly lower royalties when thermal coal prices plunge. Mining companies
may also scale back production during busts when they can’t find enough demand
for their production or if the price of the specific commodity makes it uneconomical
to maintain current production levels. The lower level of production on the
royalty company’s properties can result in it getting smaller royalty checks
from the mining companies.

I
guess this concludes part I of this analysis. I know it’s very short, but it
was meant to just touch a little about natural resource royalty companies to
let you know how awesome they are. The meat & potatoes will be in part II
of the analysis where I try to value Natural Resource Partners. Thank you for
reading. Take care and stay rational.

Tuesday, October 14, 2014

Hey, how are you guys doing? As you probably noticed, the markets haven't been doing well lately. But if you're young, trying to build wealth and have a healthy amount of cash on hand, then you should be happy that stocks are going down as you will have more opportunities to pursue. If you're a retiree that needs income and have a well-diversified portfolio of high-quality assets, then you shouldn't worry as long as the cash-generating ability of those assets is not compromised.

I personally am getting a slight thrill every time the stocks on my watch list drop by a few percent. It kinda reminds me of my university days during the sovereign debt crisis. I would come back from dinner and sometimes find that the markets have dropped by 2 to 5 percent and that a chick or two has returned my flirtatious Facebook messages. Good times, good times.

However, I would be a fucking liar if told you that the recent stock market pullback has resulted in lots of buying opportunities. Stocks have went up so much the past few years that there still aren't that many bargains even with the recent pullback. But I am finding pockets of value here and there, so I'm still enjoying myself. Although unlikely, it would be awesome if the market would crash by another 30% this year. A value investor can dream, can't he? Anyway, thank you for reading. Take care and stay rational.

Updates on the Greedy Dragon Portfolio: As I mentioned in my annual performance article, I've withdrawn Ringgit Malaysia (RM) 50,000 in cash from the portfolio. This left my portfolio with an uncomfortably low level of cash. That's why I recently sold KLCC Property Holdings and Citizens & Northern Corporation to replenish my war chest. I also reduced my borrowings from about RM 12,000 to RM 9,000 as I have less collateral with the bank and I didn't want to risk the hassle of a margin call.